Optimistic ECB likely to extend QE into 2018, says Schroders

The optimism within the European Central Bank (ECB) is expected to drive the central to extend its quantitative easing going into 2018. Although the news is full of the political strife in Europe, risk assets have performed reasonably well. Of course, with ample liquidity being pumped into financial markets by central banks, their policies have had the effect of masking the underlying political risk.

At the October press conference, ECB President Mario Draghi, gave a positive assessment of the eurozone economic outlook as he confirmed the decision to keep interest rates unchanged and to extend QE to September 2018.

Purchases will continue to include government and agency bonds, private sector bonds (credit) and asset-backed securities, but will be reduced from the current pace of purchases of EUR60 billion per month to EUR30 billion per month. Moreover, the ECB remains committed to reinvesting the proceeds from maturing assets to maintain the stock of purchases for a considerable period of time.

Overall, the ECB’s outlook and policy announcements were largely as expected, though the language used in referring to the QE programme as "open-ended" was more dovish than expected. As a result, the euro was down slightly against other major currencies, helping to lift equity markets on the day of the announcement.

"We expect the ECB to probably extend QE again at the end of next year to finally end the programme in December 2018, paving the way for a rise in interest rates in the first half of 2019," the report said.

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